Nej!: The Danish Fallout

With only 5.3 million people, Denmark is hardly a major economic power. So when the country voted no last week in a referendum on adopting the euro, stock and currency markets in Europe shrugged and showed few signs of panic. But tiny as it is, Denmark will make a difference: its decisive rejection of a common European currency will be felt far from its borders for years to come.

First to feel the impact will be Sweden and Britain, which also remain outside the eurozone and have watched Denmark for clues about when they should hold their votes on joining. On last week's evidence, the answer is not soon. "The Danish no will probably mean the Swedish referendum will be postponed beyond 2002, maybe later," said Klas Eklund, chief economist at SEB Bank in Sweden. "While the ruling party is pro-euro, the leadership will not want to repeat the Danish fiasco."

The same is true in Britain, where Prime Minister Tony Blair has been caught between members of his Labour Party who support holding a euro referendum and a clear majority of public opinion that opposes the idea. "This vote blows out of the water Labour's scare tactics on the euro," said Conservative leader William Hague, who is leading the anti-euro campaign in Britain.

Trevor Greetham, global strategist at U.S. investment bank Merrill Lynch in London, said that while few had expected euro-skeptic Britain would adopt the euro in the near term, a Danish no vote "makes it less likely Britain will ever join." With 90% of fund managers recently surveyed by Merrill Lynch saying the eurozone economy would benefit from having the U.K. inside, the Danish result has "bigger implications beyond Denmark," he says.

The fallout from Denmark will also blow across Central European states such as Poland, Hungary and the Czech Republic. It will stiffen popular opposition in core Euroland countries like France and Germany to early integration into the E.U. of those still economically fragile former communist states. Even before the vote, an opinion poll last month found that only 34% of Germans want the euro, which will begin replacing deutsche mark coins and notes in January, 2002. "A lot depends on how the E.U. institutions respond," says a Polish diplomat in Brussels. "Instead of leading the way forward with bold actions, they may be tempted to keep taking the temperature all the time."

A hint of trouble the E.U. faces on the expansion issue comes from Jörg Haider, ex-leader of Austria's right-wing Freedom Party, who called on the European Union to abandon expansion negotations with Central European countries in the wake of the rejection from Denmark. Haider said the Danish results revealed the deep distrust people in smaller E.U. states feel toward "presumptuous Brussels bureaucracy." The perception that integration of countries like Poland may be delayed could also mean reduced inflows of investment to the Central European states, which need imported capital to finance yawning trade deficits.

Another potential victim of the Danish vote is the euro itself. Launched by 11 European nations on Jan. 1, 1999 — Greece joins next year — the euro lost 27% of its value against the U.S. dollar before central banks from the seven wealthiest nations in mid-September staged a joint intervention to prop it up. The vote in Denmark "could well force the G7 central banks to repeat the bailout operation for the euro," says Lorenzo Codogno, an economist at Bank of America in London. But the threat of G7 intervention seems to have scared off speculators for the time being.

The speculators' most obvious next target would be the Danish krone, which had been fixed against the German mark and then the euro after it was born last year. As a precautionary move,ÊDenmark's central bank nudged up interest rates by a half-point to 5.6%. Central bank governor Bodil Nyboe Andersen pledged to maintain the Danish currency's value. "The fixed exchange rate policy has served Denmark well for the last two decades, and it is extremely important that this policy be maintained unchanged," Andersen said.

Ironically, Denmark's exchange rate policy may have played a small but crucial role in influencing voters to reject the euro. Because the exchange rate is fixed, politicians like Prime Minister Poul Nyrup Rasmussen who supported the euro had a hard time articulating the economic case for joining, especially after a committee of economists known as the Wise Men said in a report that there would be no significant economic changes under the euro.

With the financial benefits obscured, for many Danes the vote was a referendum on European political integration, which is deeply unpopular in the country. The final ballot reflected the depth of that sentiment. And voter turnout was over 88%, the largest since the vote to join the European community in 1972. Said Pia Kjærsgaard, head of the right-wing Danish People's Party and one of the leaders of the no movement, "We know what we've got, and we don't know what we'll get with integration."

The coalition against the euro united parties on the far right and far left. Along with political integration, the naysayers warned, Denmark would be forced to harmonize taxes with other European countries and made to cut its generous welfare benefits, such as pensions and free hospital care. Exit polls showed that more women voted against the euro than men. That was partly out of fear that, if the welfare state were reduced, women in the work force might lose their prized child care benefits.

For some time now the European project has fallen loosely into two camps. One, headed by France and Germany, advocates faster European political integration as a way of solving the Continent's problems. The opponents of political integration, led by Britain, Sweden and Denmark, prefer to maintain clear national sovereignty while enjoying the benefits of free trade. The no vote in Denmark will only serve to deepen that split.